Breaking the annuity code
Current advertising and promotion of annuities goes largely unregulated with practically no enforcement of what is being said or promised, so it’s important for consumers to understand the code words, phrases, and clichés being used to sell annuities.
1. Reasonable rate of return
This phrase is used to primarily promote indexed annuities. No one really knows what “reasonable rate” means — and it’s the perfect fill in the blank sales pitch to verify whatever number is in your mind. Most people’s return expectations are too high, and aren’t in line with realistic returns. This “reasonable rate” line feeds right into a consumer’s unrealistic dream scenario.
2. Any sales phrase using the word ‘senior’ or ‘boomer’
We all are aware that the main annuity sales targets are seniors and boomers because demographics don’t lie, and that’s where most of the retirement assets are. Too many annuity pitches include the words “senior” or “boomer” and are sometimes combined with Social Security seminars as the bait to sell annuities.
3. Market upside with no downside
This is a favorite indexed annuity cliché with the sole purpose of hoping you believe that you can have your investment cake and eat it too. There is no product that will fully protect the downside and give you real market performance. Indexed annuities were designed to produce CD like returns, not the stock market, and that’s what they historically have done and will continue to do.
4. Never charge a fee
This claim is a perfect example of the sales semantics word game. All annuities and life insurance pay commissions to the agent, and that amount is built into the product. In other words, you won’t see it taken out of your premium amount, and on the surface it is a net transaction to you. Annuity agents might not be charging an annual money management fee like a planner, but they are getting paid.
5. Never lost a penny
This is an indexed annuity favorite, and is actually true because it is a fixed-annuity structure, and therefore protects the principal. The problem is that in most cases, the “never lost a penny” phrase is usually combined with the market upside dream pitch. Remember that if it sounds too good to be true, it always is.
6. Market growth with a guaranteed floor
This feel good pitch is used with both indexed and variable annuities, but more often with variables. There’s always a catch, and with this cliché the catch is when you attach a guarantee (aka: rider) to a variable annuity, your investment choices are usually very limited. Also, the “floor” that agents talk about in most cases are an income rider calculation that can only be used for income and cannot be accessed in a lump sum.
7. When the market goes up, your account goes up
This line is used with indexed annuities and indexed life insurance products as well. As with most of these sales pitches, there’s a portion that is true but a huge gap of facts that are left to the imagination of the buyer. What isn’t typically revealed are the limitations to the indexed growth, and that most carriers can change the terms of the index option used to determine that annual growth in addition to the fact that any supposed gains can only be locked in one day a year.
8. 12% returns … Warning … Don’t buy
Fear and greed sells, and a lot of indexed annuities and indexed life insurance products are sold on the fear of another market drop or a 2008 type event. Most people want to be cautious by nature, so these annuity clichéd warning signs and phrases are a magnet to seniors and baby boomers trying to make a prudent decision on an annuity product category that most don’t fully understand.
9. State Guarantee Funds are just like FDIC
This is one of the biggest whoppers, and one that annuity agents love to throw out, especially when they are recommending a low rated or marginal carrier. FDIC is the mother of all guarantees, and there is no equal in my opinion. Remember that “F” stands for federal. Annuities are regulated at the state level, and each state does have a guarantee fund that backs up annuity purchases to a certain level. However, most states prohibit agents using or mentioning the fund in the selling process, and certainly would frown upon any FDIC correlation.
10. It’s a hybrid annuity
This is the most popular annuity cliché of the day, and is the current feel good sales word “hybrid” used to primarily push indexed annuities. Once again, “hybrid” is one of those fill in the blank feel good words that makes people think they are getting more for their money. Hybrid evokes the thought of multiple benefits, but the ugly secret is that all annuities offer multiple benefits of some fashion.
Annuity consumers have to understand that annuity advertising and promotions are regulated and overseen at the state level. Each state insurance department is responsible for enforcement, along with the supposed self regulation of the carriers themselves. Let’s just say that neither are fulfilling their duties, in my opinion, and their lack of attention to these misleading messages is disappointing and puzzling to the majority of agents presenting annuities correctly.
Google the word “annuity” and buckle your seat belt for an aggressive sales pitch and video ride. Local and satellite radio along with scattered TV ads constantly echo annuity clichés and buzzwords in the persistent drive to attract annuity dream catchers to the annuity dream slingers.
What’s sad in my opinion is that annuity strategies can actually stand on their own contractual merit, and these snake oil methods aren’t needed to attract people to the transfer of risk benefits that annuities can provide. Caveat emptor my friends, especially when it comes to the advertising and promotion of annuities.
Originally published 3.18.14 by MarketWatch.com – http://www.marketwatch.com/story/breaking-the-annuity-code-2014-03-18